Lloyds Banking Group Centre for Responsible Business, University of Birmingham
Better education and support to clients who need it, a collective demand for transparency in finance, and improved distribution of information to clients are all needed to enhance the level of financial capability across the UK.
In a world that has grown immensely in terms of financial sophistication, as well as intensity and speed of transactions, financial capability continues to be a much needed every-day skill. According to the Strategy for Financial Capability, the concept means having the ability to “manage money well day to day, prepare for and manage life events and deal with financial difficulties”.
There is an increasing gap between people who keep up with rapid financial sophistication and people who have a strong need for financial support but have lost contact with increasing financial refinement. The former are familiar with financial instruments, such as credit, interest rates, investment, risks, pension funds, re-mortgaging and equity. The latter are struggling with their monthly payments, lacking financial capability, and frequently falling prey to accessible and sometimes risky online options, including payday lenders, without fully understanding the terms and immanent risks.
A survey by Future Finance in 2016 discovered that 31 per cent of students were using credit cards and payday loans to cover their university costs. Also, research by the London Institute of Banking and Finance demonstrated that 58 per cent of students aged between 15 and 18 did not receive any form of financial education. Figures from the Financial Capability Strategy for the UK are indicative enough;
- 12 million people in the UK are not saving enough money for their retirement,
- 27 million do not have a sufficient savings buffer to allow them to cope with a significant income shock,
- 21 million don’t have a modest £500 savings buffer to replace a fridge or mend their car,
- and around 8 million have problems with debt and, most importantly, only one in six are seeking help.
However, it should be underlined that these figures do not just reflect the lack of financial capabilities, but also represent the UK’s problem with poverty, stagnant income from labour and rising inequality.
In the context of financial capability, it is important to speak about financial vulnerability, namely those in need of financial education. They usually come from underprivileged social and ethnic backgrounds, with inconsistent or poor credit history; these people are in need of access to fair finance, which would help them to break the vicious circle that they are in.
Much previous research has persuasively demonstrated that the problem of being in debt frequently leads to mental health issues, giving society additional reasons to address the problem. However, the division between those with financial capability and those without is not always clear – as the example mentioned earlier with students confirms – given a vast majority of the population actually need enhanced financial literacy.
There are lenders who are responsible, who support the borrowers, and do not capitalise on the vulnerability of their clients but instead try to help them through partnership and education. These responsible lenders are mostly grouped around Community Development Finance Institutions and Credit Unions, which are not-for-profit financial infrastructure. They lend to individuals, but also to small- and medium-sized enterprises and are led by ideas of a broader social benefit rather than just profit. Nevertheless, because of their numbers and financial capacities, these Community Development Finance Institutions and Credit Unions often serve just a minor part of the population. Better education and support to clients who need it, a collective demand for transparency in finance, and improved distribution of information to clients are all needed to enhance the level of financial capability across the UK.